Protection for this curious system arises from Dubai's awkward alliance with the UAE, which keeps meddling from rival rulers to a minimum and provides military muscle. Mohammed saved himself a bundle in 1997 by handing a 14,000-man army to Abu Dhabi, the largest UAE member and owner of 90% of the federation's oil and gas reserves. Abu Dhabi also operates the UAE's central bank, which pegs the local currency, the dirham, to the greenback and is the final arbiter on financial regulation.

How did this castle in the sand arise? A century ago enterprising merchants turned to Dubai's tiny port to avoid taxes at the Persian port of Lingah. Fifty years later Dubai was a hapless British colony with a diminishing pearl trade and ship traffic. Mohammed's father, Sheikh Rashid, dredged and modernized the port. The Jebel Ali port is now the largest man-made harbor in the world and a tax-free zone. With fees from port traffic, he laid down the nation's first airstrip. Today Dubai International serves 105 airlines connecting 250 destinations. Tourism is 20% of GDP.

Mohammed, the third eldest of Rashid's four sons, went to the Bell School of Languages in Cambridge, England, where he studied the English language--and the racetrack. But when oil was discovered back home in 1968, he joined his father at a secret desert negotiation to forge an alliance with Abu Dhabi. Three years later Rashid's heir became the world's youngest minister of defense--and soon had to deal with the 1973 Yom Kippur attack on Israel, an attempted coup in neighboring Sharjah and a hijacking at Dubai International Airport. Leadership by fire. "I watch. I read faces. I take decisions," he says. "And I move fast. At full throttle."

Especially when it comes to free trade. Knowing that UAE oil would dry up by 2020, Mohammed was bent on stripping out regulations to attract foreign business in an avowedly protectionist region of the Middle East. He created four free-trade zones, which eventually drew the likes of Microsoft, Cisco, CNN and Reuters. His open-skies agreement, with unlimited frequencies and capacity to all carriers, persuaded Air France to consolidate regional cargo operations in Dubai. Thanks to prolonged civil conflict in Lebanon and the Iran-Iraq war, Dubai had little competition. With just $10 million Mohammed created Dubai's first state carrier, Emirates Airlines, in nine months. It became the first state-owned entity to publish audited profit-and-loss figures; it has been in the black every year, save one, since its founding in 1985.

Not all the sheikh's projects make money. The Burj Al Arab hotel doesn't. Taxi drivers in Dubai know it as "the world's only seven-star hotel"--but its nightly rates of $1,500 to $7,332 aren't enough to turn a profit. "You have to think of why it was built," explains pal Al Habtoor, whose firm helped construct it. "People don't visit Paris without seeing the Eiffel Tower, do they?"

Symbolism can pay off. Weeks after Sept. 11 Mohammed authorized the purchase of $35 billion worth of Boeing and Airbus jumbo jets for Emirates, just as other customers were abandoning their orders. He looked like a hero--and managed to negotiate discounts amounting to $20 billion. Last year the sheikh spent at least $400 million and sent his ministers on multiple trips to Washington to beat out Singapore as host to the annual meetings of the World Bank and the International Monetary Fund. The events brought 15,000 visitors to Dubai, along with the global media.

Now to attract more foreign capital. Remember that pair of man-made islands in the shape of palm trees, 3.5 billion cubic feet of sand? Someone like Donald Trump might be interested: Due for completion in 2007, the project will offer $400,000- to $1.5-million ocean-view villas, 40 hotels--plus a water theme park with dolphins and killer whales--and a $550 million shopping mall.

Trouble is, no federal law permits foreigners to buy land in the UAE. Still, Mohammed has authorized the state-run property development company, Nakheel, to allow foreigners to invest in real estate via 99-year leases. But the draft of a new bill from the 40-member UAE federal national council leaves open the question of whether foreigners can resell property, or will it upon death, even if Islamic law prohibits it.

Mohammed faces other problems with the law. Last month the UAE's central bank announced an investigation into whether foreign criminals are laundering money in Dubai by paying for property with cash--the source of about 10% of real estate sales to foreigners last year. The probe is driven in part by a UAE anti-money-laundering law passed right after Sept. 11. (One of Osama bin Laden's henchmen wired $100,000 from Sharjah to Florida accounts opened by two of the hijackers. So far there is no proof of a link between any of Dubai's 50 major banks and the attackers or al Qaeda.) The recent revelation of a Dubai national's role in the smuggling of nuclear materials from Pakistan to Libya could prompt further investigations.

Parting the curtain on secretive financial operations is also crucial--and helps explain why the collective Arab region wins less than 3% of foreign direct investment in developing countries. "Greater transparency is high on Dubai's list," says Hashem Montasser, an investment banker at J.P. Morgan.

So far Dubai has gotten by without much capital abroad, and Mohammed hasn't solicited a rating from a major credit agency. But there is potential for a bond market. The government floated an issue last year to cover hosting of the World Bank conference. The five-year issue, with a 3.1% coupon, was oversubscribed. The prospectus revealed the book value of such core government holdings as the electric and water utilities, an aluminum factory and an oil company: $6 billion.

Greater liquidity would help, too. A more active stock market might encourage some of the 2,500 companies already operating in the sheikhdom to list on the Dubai Regional Exchange--and rent office space in the Dubai International Finance Center, a seven-building, $1.8 billion complex. Mohammed is trying to make it easier for them to do so by leaning on the DIFC's regulatory arm to allow for 100% ownership and 100% tax-free status to any financial services company that chooses to locate there. Added bonus: exemption from federal rules that burden other banks--like having to increase the number of UAE national hires by 4% a year. Aon, Credit Suisse and Standard Chartered are among the applicants for licenses to operate in Dubai, says Naser Nabulsi, the Merrill Lynch-trained chief executive of DIFC. All of them assume that the UAE Central Bank, no pushover, will sign off on the sheikh's liberalization.

Mohammed is a very busy man these days. "He doesn't sleep much," says Lynton Jones, a British expat hired last September to open Dubai's new stock exchange. "He'll show up early on a Saturday morning and say, Show me what's going on.' And if you present him with a problem, he wants to sort it out instantaneously." Like deciding to add dozens of customs and immigration agents after visiting the airport's overcrowded arrivals hall at 1 a.m.

No detail is too small to vet. Mohammed weighs in on lease proposals for Dubai Internet City, part of a tax-free, 5-million-square-foot office park for silicon and software. He analyzes new ways to process parking fines on the Web and locate missing animals that escape a wildlife park. He has perused 50 studies from 42 different consulting firms for Palm Island.

Saddam may be gone. But Dubai feels threatened--by its capitalist Gulf neighbors. Bahrain, already a prominent financial center, beat out Dubai in January to bring the Formula One racing franchise to the region. Qatar is courting Washington with its vast natural gas reserves. And Kuwait recently signed an investment and trade agreement with the U.S. Which means that Mohammed will simply have to hustle a little faster. "There have [always] been critics and naysayers," he says. "We have the will, the passion and the resources to drive this success."

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